Andrew Haughwout, Donghoon Lee, Joelle Scally and … · Andrew Haughwout, Donghoon Lee, Joelle...

Home Prices, Housing Wealth and Home Equity Extraction Andrew Haughwout, Donghoon Lee, Joelle Scally and Wilbert van der Klaauw

May 17, 2018

The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.

Outline of Today’s Material

I. Recent developments in household credit, home prices and homeownership

II. Growth & change in housing wealth, aka home equity

III. Home equity extraction: A. How much? B. Who? C. Why?

1

I. Household Debt, Home Prices andHomeownership

2

Total debt is rising, but more slowly this time

0

3

6

9

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15

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15Mortgage HE Revolving Auto Loan Credit Card Student Loan Other

Trillions of Dollars

Total debt balance and its composition Trillions of Dollars

Source: New York Fed Consumer Credit Panel/Equifax

(3%)

(11%)

(6%)

(9%)

(3%)

(68%)

+$2.1T (18%)

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(3%)

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+$1T (12%)

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(3%)

(11%)

(6%)

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(3%)

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+$4.8T (93%)

5

Tight mortgage standards part of the story

Mortgage Originations by Credit Score* Auto Loan Originations by Credit Score*


* Credit Score is Equifax Riskscore 3.0

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<620 620-659 660-719720-759 760+

Billions of Dollars Billions of Dollars

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Home prices have recovered previous peak . . .

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+73% in 6 years

. . . but this recovery has been notably slower

8

Series 1

(Left Axis)

Series 2

(Right Axis)

Series 3

(Left Axis)

Series 4

(Right Axis)

Series 5

(Left Axis)

Series 6

(Right Axis)

Homeownership rate returning to normal

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1965 1969 1974 1979 1984 1989 1994 1998 2003 2008 2013

Percent Percent

Source: Census Bureau via Haver Analytics Note: Shading shows NBER recessions.

9

Series 1

(Left Axis)

Series 2

(Right Axis)

Series 3

(Left Axis)

Series 4

(Right Axis)

Series 5

(Left Axis)

Series 6

(Right Axis)

Homeownership varies by age

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54

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60

65

70

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85

1993 1995 1998 2000 2002 2004 2007 2009 2011 2013 2016

Percent Percent

Source: Census Bureau via Haver Analytics

Note: Shading shows NBER recessions.

Homeownership rate is seasonally adjusted.

Ages 35-45 (Left Axis)

Under 35 (Right Axis)

Ages 45-55 (Left Axis)

Ages 55-65 (Left Axis) Ages 65+ (Left Axis)

10

Summary of Part I

• Household debt continues to grow and has surpassed previous peak• But growth has been sluggish

• Tight mortgage standards a crucial part of the story• No significant revival of subprime in mortgage, unlike auto

• Home prices have now recovered after an unprecedented rise and fall

• Homeownership followed a similar path, diverging from its history

• Rise and fall of homeownership especially strong among young 11

II. Growth & Change in Housing Wealth

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Aggregate housing wealth has recovered . . .

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Owner's Equity, $ Billions Owner's Equity, % of Value, Right Hand Scale

$ Billions Percent

Source: Federal Reserve Board of Governors 13

Median Borrower Equity by County, 2006 ($)

Source: Fuster, Guttman-Kenney and Haughwout, 2016, updated 14

Housing wealth shifting to older borrowers . . .

24%

52%

24%

2006

14%

45%

41%

2017

<45

45-60

>60

Source: Fuster, Guttman-Kenney and Haughwout, 2016, updated

Tappable Equity (LTV ≤ 80)

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. . . and to higher credit score borrowers

20%

36%

44%

2006

16%

31%

53%

2017

<700

700-780

> 780

Source: Fuster, Guttman-Kenney and Haughwout, 2016, updated

Tappable Equity (LTV ≤ 80)

27

Summary of Part 2

• Home price recovery and slow debt growth have produced record high in housing wealth, aka home equity

• Tight credit standards and reduction in homeownership, especially for the young, have contributed to a shift in housing wealth toward older, higher credit score borrowers

• Home equity is crucial form of collateral, meaning that young people’s access to low cost credit is affected

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III. Home Equity Extraction

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Trends in home equity extraction

• Two ways to extract equity without moving: cash-out refis andjunior liens

• Home equity extraction was a significant upward force onmortgage balances during the boom, but has been mixed since2010:

– Impact of cash out refinances is boosting balances, but slowly

– Junior lien activity has remained a net-negative force on housingbalances since 2010

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Cash out refis increase slightly

Source: New York Fed Consumer Credit Panel / Equifax

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2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1

Home Equity Extraction (annual change)

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Cash out refinance

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Junior lien equity being repaid on net


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2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1


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Cash out refinance

Junior liens (includes HELOC and HELOAN)

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Aggregate equity extraction remains low


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2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1


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Aggregate Equity Extraction

Cash out refinance

Junior liens (includes HELOC and HELOAN)

33

Mortgage underwriting remains tight, especially for equity extraction


660

680

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800Median Credit Score at Origination

purchase cashout heloc

Credit score is Equifax Riskscore 3.0

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Since 2009, extraction has been dominated by highest score borrowers

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HELOC Originations (Initial Pledge Amount)

<620 620-659 660-719 720-759 760+

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Cashout Refinances

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Source: New York Fed Consumer Credit Panel / Equifax Credit score is Equifax Riskscore 3.0

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Borrowers are much older than in the past

• Only 13% of borrowers in 2006were over 60

• 28% of borrowers who extractedequity in 2017 were over 60years old

• Only 25% of borrowers whoextracted equity in 2017 wereunder 45


41% 41% 25%

47% 46% 47%

12% 13% 28%

2002 2006 2017

Equity Extractors Age of Borrower:

<45 45-60 >60

36

Reasons for new HELOCs or cashout refinances

• Piggyback: Originated concurrently with a first mortgage, oftento avoid PMI or to finance a down payment

• Consolidate: Pay off other types of debt balances andconsolidate to more favorable rate

• Spend: Finance a large expense (home renovation, equipmentpurchase, vacation)

• Refi: Refinance existing housing debt to more favorable term orrate

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Equity withdrawals are smaller than they used to be

Source: New York Fed Consumer Credit Panel / Equifax;

HELOC draw is report as balance in 3rd quarter of loan life

$46K

$24K

$27K $25K

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median cashout median heloc drawThousands

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The use of piggyback HELOCs has declined since the boom


24%

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8%

0%

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25%

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Share of HELOCs Originated as Piggyback

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Debt Consolidation

• We study the changes in credit card debt and student debtamong HELOC originators

• Comparing 2006 and 2017 HELOC Originators:

– 2006 originators were primarily levering up, with a small decline inaverage credit card balances, and piggybacks a large share

– 2017 originators’ credit reports show evidence of credit card andstudent loan consolidation

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Debt consolidation is more common among recent borrowers

5% 7%

-5% -10%

2006 2017

Credit Card Yearly percent growth in avg bal

everyone else originators23%

5%

12%

-5%

2006 2017

Student Loan Yearly percent growth in avg bal


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Wrapping Up

• Home prices have recovered, but homeownership has not, especially foryounger Americans, compounded by tight underwriting

• Housing wealth has shifted toward older, more creditworthy borrowers– limiting asset growth and collateral growth

• Equity extraction is relatively low now, considering potential uses to borrowersand high levels of tappable equity– Post-recession tight underwriting and lack of equity have resulted in lower issuance of

collateralized credit to younger borrowers– Older, more credit-worthy borrowers have seen a larger share of recently extracted equity– Equity extraction for credit consolidation is more common recently than in past years

• Home equity is an important form of wealth and access to low-cost borrowing,and we will continue to monitor its behavior

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